Essentially, there is good debt and bad debt. Good debt includes debt to purchase essentials that you can’t afford to pay up front, but will be able to pay later, or debt incurred to purchase anything that increases in value (e.g. your house, investments, etc.). Bad debt includes debt you’ve taken out for things you don’t need, and can’t afford to pay back (e.g. using a credit card to fund an impulse purchase).

Improved management means reducing the amount of bad debt in your financial plan. This is easier said than done because credit card debt is often charged at high rates and there is little incentive to pay them out. In fact, many consumers have been offered limit increases without checking the customer's ability to repay that amount. If this has happened to you, contact a financial counsellor.

Tips to reduce your financial exposure and improve the quality of your financial life include:

• Decrease the limits on your credit cards. As you reduce the outstanding balance, decrease the limit. This will give you a sense of achievement. Once you have done this:
• Consider moving the outstanding balances on the credit cards to one card, preferably the one with the lowest interest rate. Cancel any nil balance credit cards, or if you are concerned about not having access to emergency cash, stick in the freezer in a bucket of water to stave off temptation.
• The quicker you can reduce the amounts owing on your credit cards, the better. You will need to live within a budget so any spare cash can be put to reducing "bad debt."

When bankruptcy is the best option

Bankruptcy is the most extreme action for your credit rating as it can be placed on your credit file and can prevent you from being able to borrow for up to 7 years.

On the other hand, bankruptcy can result in a positive financial experience, allowing a person the opportunity for a clean slate and start a new life.

It is important to fully explore bankruptcy options before making any decisions. The first important step is to obtain a Bankruptcy Kit. This can be downloaded from the Insolvency Trustee Services Australia [ITSA].

ITSA recommends that you seek expert advice in relation to bankruptcy. This includes financial counselling. A financial counsellor will provide you with information to suit your needs and identify any alternatives.

Please note that community-based financial counsellors are free and do not charge a fee to complete bankruptcy paper work. There are some companies that do. The Financial Counsellor’s Association of Queensland (FCAQ) do not recommend fee-paying financial counsellors.